FINANCIAL REPORTING AND AUDITING UNDER ALTERNATIVE LEGAL REGIMES.

摘要

This thesis analyzes the impacts that alternative legal regimes have on an owner's financial reporting decision, an auditor's audit quality choice, and investors' pricing decisions. Three aspects or dimensions of the legal environment are analyzed: damage apportionment rules, liability rules, and whether or not damages are "coupled." The damage apportionment rule proscribes which party is responsible for the shortfall when a co-defendant is unable to make full restitution. Three damage apportionment rules are analyzed: joint-and-several, pure proportional, and a hybrid proportional rule instituted by the 1995 Private Securities Litigation Reform Act. Two liability rules are analyzed. Under a strict liability rule, the auditor is held liable every time an audit failure occurs. Under a vague liability rule, the auditor is only held liable when the jury finds that she was negligent in the performance of the audit. Damage payments are traditionally "coupled" in that the damages received by the plaintiffs equal the amounts paid by the defendants. Under a "decoupling" regime, this link is broken. Specifically, the plaintiffs receive none of the damages paid by the defendants, which instead go to a neutral third party.; The strategic interactions between the players' strategies are analyzed within a setting where all three players' payoffs are endogenously determined and vary with the legal environment. The audit failure rates resulting from the various legal regimes are compared. The main finding, which is replicated along all three legal dimensions analyzed, is that the audit failure rate can actually be highest under the legal regime that leads to the highest level of audit quality. This result is surprising because, ceteris paribus, higher levels of audit quality lead to lower audit failure rates. These results occur when the low-type owner plays a mixed reporting strategy that varies with the legal environment.